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Adelman's Rule and the Petroleum Firm

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  • Robert D. Cairns
  • Graham A. Davis

Abstract

Observing that net prices do not rise as predicted and that resource stocks are not fixed, Adelman questions Hotelling's model of an exhaustible resource. He cites a rule of thumb for valuing oil reserves which is about one-half that given by the Hotelling valuation principle. We apply an optimization model to a stylized characterization of an oil reservoir. Adelman's valuation rule is confirmed. An r-percent rule emerges as well, but it is not Hotelling's rule. We end the paper with our interpretation of Hotelling's rule. We also consider the role of investment in augmenting the quantities of a resource currently extracted.

Suggested Citation

  • Robert D. Cairns & Graham A. Davis, 2001. "Adelman's Rule and the Petroleum Firm," The Energy Journal, , vol. 22(3), pages 31-54, July.
    • Handle: RePEc:sae:enejou:v:22:y:2001:i:3:p:31-54
    DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No3-2
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    References listed on IDEAS

    as
    1. Stephen L. McDonald, 1994. "The Hotelling Principle and In-Ground Values of Oil Reserves: Why the Principle Over-Predicts Actual Values," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-18.
    2. Morris A. Adelman, 1993. "Modelling World Oil Supply," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-32.
    3. Thompson, Andrew C., 2001. "The Hotelling Principle, backwardation of futures prices and the values of developed petroleum reserves -- the production constraint hypothesis," Resource and Energy Economics, Elsevier, vol. 23(2), pages 133-156, April.
    4. G. C. Watkins, 1992. "The Hotelling Principle: Autobahn or Cul de Sac?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-24.
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    More about this item

    Keywords

    Hotelling's Rule; oil industry; Exhaustible resources; Adelman's Rule; oil field valuation;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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